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New Thomson Reuters Content Offers Practitioners Guidance on Passive Foreign Investment Companies

The latest topic added to Thomson Reuters Checkpoint Catalyst is Passive Foreign Investment Companies (PFICs), which covers the taxation of U.S. shareholders of passive foreign investment companies. The new coverage helps advisors determine whether or not a foreign entity qualifies as a PFIC as well as the tax treatment of U.S. holders of PFIC shares under default rules and alternative elective rules.

The PFIC rules target foreign entities that operate like mutual funds. The goal of the rules is to prevent deferral of U.S. income tax on foreign investment income channeled through foreign companies in order to equalize the treatment of investors in domestic and foreign mutual funds. However, the rules apply mechanically and are broad in scope, covering many foreign companies that are not mutual funds. Penalties associated with PFIC income can be significant, so it is important for practitioners to identify potential PFICs when advising clients, either to avoid their creation or to properly comply with the PFIC rules in order to minimize the future tax burden on investors.

”A clear understanding of the PFIC rules is essential in avoiding unnecessary taxation and compliance burdens on U.S. investors in international vehicles—whether in industry, private equity, or hedge funds,” said Chris Migliaccio, editor and author with the Tax & Accounting business of Thomson Reuters and the author of the new Checkpoint Catalyst topic. ”This content will allow practitioners to effectively spot PFIC issues so they can be addressed as early as possible in the planning and compliance process.”

The new topic addresses ways to identify PFICs in the transactional process as well as strategies for complying with PFIC rules. It examines the various regimes of PFIC taxation, assisting practitioners in understanding the requirements and the pros and cons of electing a particular taxation regime. It also provides practical guidance and tools for communicating information about PFICs to investors.

Checkpoint Catalyst is a collection of multijurisdictional analyses of specific tax issues and business transactions from a practical, workflow perspective, covering implications at the federal, state and U.S. international levels. Checkpoint Catalyst also provides expert guidance on a range of other related subjects, including:

  • Controlled Foreign Corporations
  • Subpart F income
  • Capital Gains and Losses
  • Reorganizations
  • Earnings and Profits